A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

Taxes today.

Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing.

Printing money. It’s not generally done this way, but in effect the monetary authorities can monetize the borrowing of a sovereign entity (how they do it is beyond the scope of this post). For simplicity, imagine instead that a central bank prints new bank notes from scratch, hands them to the Treasury, and then the Treasury spends them on goods and services. This is just another form of a tax, again beyond the scope of this post.

So, this is what the government budget identity looks like for “normal” countries:

G = T + the change in debt + the change in base money

I think this is a useful simplification, but I wanted to add a couple other refinements (refinements by the way he did not neglect in his text, just did not put in the formula). One other source of funds we have seen in Greece is what I would call Aid, which used to be humanitarian aid (think India in the 1970s) but today tends to be bailout money and debt forgiveness. So we will write the equation

G = Taxes + ΔDebt + Money Printing + Aid

But due to the Keynesian orientation of many commenters on the Greek and European situation, it becomes useful to expand the "taxes" term into some sort of base income, which I will just call GDP for simplicity, and some sort of tax rate t. So then we get:

G = GDP x t + ΔDebt + Money Printing + Aid

The Greeks can't print money (unless the EU does it for them) and at the moment no one in their right mind will lend to them without guarantees from stronger European countries (e.g. Germany). If we call EU money printing for Greece or EU loan guarantee programs Aid, we get

G = GDP x t + Aid

As Rizzo noted, aid is drying up and Greek tax revenues are going down rather than up, so basically they are screwed. The only out seems to be for Greece to exit the Euro and then, once on the drachma again, print money like crazy and inflate their way out of the debt.

But expanding the tax term reveals one more policy alternative that is being suggested. Keynesians seem to believe there is a path out of this situation in Greece (or if Greece is too far gone, certainly in Italy and Spain) where money from some source (aid, borrowing, whatever) is spent in the economy by the government in some way that is stimulative, thus increasing GDP and therefore taxes and allowing Greece to increase the money available to the government. Since Aid is currently only be granted tied to "austerity" programs rather than stimulative spending, they feel Germany et al are following exactly the wrong course.

I am incredibly skeptical of this for two reasons, beyond just my general skepticism of Keynesian stimulus. First, I have heard something akin to this in my personal experience. For a short time in my life, during the Internet crazy period, I was brought in by some investors to look at their portfolio of languishing Internet plays (e.g. discountshoelaces.com)* and decide if they should keep pouring money in or shut down. The plan I got from management was always - always - this stimulus approach. They suggested that rather than cut back, the investors should give them a bunch of new money to really blow out the marketing effort, which would kick start their growth, etc. etc.

The problem was that they never, ever had a lick of evidence beyond just hope that the next $1 million would suddenly do what the last $10 million failed to do. So we shut most of these efforts down. Your first loss is your best loss, as they say.

Similarly, I don't think Keynesians can point to any example in history where this actually worked. A country is drowning in debt, but suddenly a Hail Mary play of adding a huge chunk more to the debt and spending it on civil service worker salaries suddenly turned the tide. Seriously, do people honestly think this will work? Or are they just frustrated because they grew up with an assumption that there is always a public policy answer for everything and there just does not seem to be one here.

I have an emerging hypothesis, not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases. I am not sure in actual practice it is ever above one, but if it were to be above 1 at 20% debt to GDP, it certainly is not going to be the same at, say, 150%.

No math needed. If I told you that my business plan of didn't succeed because I kept losing money hand over fist and am now Y deep in debt but that if you bailed me out at 2*Y I'd probably be all sorts of successful, would you lend me money? What if there was ample evidence that X included all sorts of fraud? What if lending me X/2 in the past hadn't achieved anything?

At some point, "aid" is nonsensical.

http://EasyOpinions.blogspot.com Andrew_M_Garland

Economic News of the Future:

Keynesian economists I.M.Whacknut and M.T.Mindset have released a breakthrough paper. By simplifying their observation protocol, they have identified the direct operation of the Keynesian Multiplier. "We are surprised that this simple system shows such a clear signal", reports Mindset.

They set out to observe money in action "in the wild", in a local administrative office. Whacknut: "We thought that there would be a better paper trail in an office". They were rewarded almost immediately.

The company president Toppman took $9 from corporate cash (stimulus spending) to buy 12 donuts for a morning meeting. He presented these to the staff. It took Whacknut and Mindset only a moment to realize what they had witnessed.

12 donuts of value came into possession of Toppman, which then produced 12 donuts of value in the meeting system, where unfortunately they were consumed. The total of 12 + 12 = 24 donuts is a direct representation of the Keynesian multiplier of 2.0 in this case.

Whacknut: "These types of transaction are usually fragmented, poorly documented, and devilishly hard to measure. The tiny scale of the donut transactions nevertheless reveals the essential nature of the Multiplier."

Whacknut and Mindset are working on a more sophisticated experiment, where Toppman gives the donuts to secretary Sally, who then presents the donuts to the staff. Whacknut: "We believe that we can achieve a Multiplier of 3 in this case, and even higher values in the future".

- -
If the 1935 economist Keynes were correct, then all would be glorious. Unfortunately, he was a crackpot. The Keynsian multiplier is a mistake, counting transactions as if the entire value of each transaction creates wealth instead of merely valuing or transferring wealth.

Governments have other sources of revenue than the ones you listed. Most governments own valuable land and real estate that can be sold. They can sell their museums, libraries, and parks. Governments can sell things they control such as broadcast frequencies. Governments can sell highways and bridges to private companies who will maintain them using toll revenues. Similarly, governments can privatize airports and air traffic control.

Greece is in such bad financial shape that selling everything its national government owns or controls would provide only a few years grace.

G is a part of GDP, and for some countries, it's a very large part. For Greece G/GDP = 47%

So, I'd propose adding the following to your working hypothesis...

The Keynesian multiplier is negatively related to the pre-existing ratio of G/GDP, approaching zero as G/GDP approaches 100%.

Just imagine an economy with no private sector (e.g. North Korea) where G = GDP. Any government spending in one part of the economy must be directly removed from another part of the economy, (since the govenment produces nothing) thus giving a multiplier of zero.

NormD

I think you are missing the point.

Liberals know that things are imploding.

They know more stimulus will not be forthcoming, and even it it was they would claim is was too little.

What they want/need is an excuse they can point to so they can claim the implosion is not the fault of their policies.

They and their media friends will go on talk show after talk show and say "if only they had followed our advice this would never have happened"

Never underestimate the lengths people will go to not have to admit they were wrong.

Evil Red Scandi

1) I think that it's dangerous to assume that the Keynesian multiplier must be a positive number. I'd suspect that it's actually negative in many cases, without having to dig terribly hard for "what is not seen."

2) I think NormD is correct - this is mostly posturing to try to set up where the blame will fall.

Mark2

What people forget is where the Keynesian money comes from. Part of the theory is that people save about 10% of their income and Government saves just about zero. So the idea is you tax people more and spend their money Viola! you just put 10% more into the economy, and that is what multiplies 2 - 3 - 4 X over.

There are some problems. One is that many people confuse money with wealth. Money only represents wealth. Throwing extra dollars around does not increase wealth unless you can convince people to produce more, otherwise you just get inflation.

Point two, as far as saved money is a store - it is loaned out by banks to people who want to use it productively. The bank will expect a positive return for the money from the person they will invest in, and make sure the person plan will generate considerable amounts of cash beyond the value of the loan. This actually does create a multiplier effect since the bank makes sure (with 95% certainty) that that is want happens. Government doesn't do this they tend to hand the cash out to non-productive uses and for companies that could not pass muster by the banks. So the good money is taken from the people and instead of multiplying gets wasted.

Keynesian stimulus only works if you assume the money comes out of thin air, and the mere existence of more money passed out by the government will make people produce more than they would have. Doesn't work that way.

However, I can not deny on paper it is an elegant hypothesis. Also can't deny that Keynes also said during good times the governments need to pay back the "debt" they accumulated during bad times. And that is also another government flaw - that almost never happens. Blame Keynes for that, eh probably not.

Xmas

Evil,

A negative multiplier would be very terrible. I think you mean the multiplier is less than 1. E.g. a .98 multiplier means that 1 dollar spent by the government produces 98 cents of economic activity. A multiplier of -1 would mean that every dollar spent by the government actually reduces overall economic activity by one dollar MORE than what the government took out in the first place.

tetsefly

So what the difference between Keynesian and a lottery ticket?

Mark2

@tetsefly

At least you can frame the lottery ticket

Barum bum.

Evil Red Scandi

Xmas - No, I mean negative, hence very terrible as you describe. I don't suck at math that badly, although at times I have worked hard to do so.

Mark C

Russ R hits on it, G spending is included in GDP. However, this to me leads to a great error; the government produces essentially nothing (ok some services, but look at where the majority of spending goes and at this point it is redistribution). Keynesians believe that aggragate spending is the goal so bumping up the GDP is all important. However, if a bank lends a $1 to a growing business, you get multiplication. If the government takes that dollar (no matter why) you might get 10 cent return in created services, or for redistributed wealth I think you could make an argument that the multiplier would be negative(incentivizing people to not work and only to consume). In short all spending is not equal. Keynesians also do not look at the long-term consequences of spending what you don't have.

In short what you have is break the government spending into catagories and determine the multiplier based on that category. You would also need a seperate multiplier for debt effects. Don't forget to add time as a variable. And take into account that when you change spending in one area it effects another. Lots of luck, I think it was Hyack that said its complicated.

Another guy named Dan

It is probably possible for any particular dollar spent by the government to have a positive or negative, and above or below unity multiplier. However, Keynesian economics still collides with the knowlege problem. The government cannot in advance predict which spending will produce positive multipliers in excess of unity. For instance, it is not at all clear that one couls have in the early 1970s deduced from first principles that money spent on ARPANet would have a higher payoff than money spent on personal jetpacks.

This leads to the other failing: the aggraget "stimulus" spending is in nealry all cases doled out by a political organization. The decisions on which projects to spend money on are thus political. Whatever possible gain gets swallowed up by deadweight loss and rent-seeking costs, and we get Solyndra.

Evil Red Scandi

Mark and Another guy named Dan both touch on the essential point (well covered by the Austrian school): value is subjective. Keynesians just look to see that money is flowing around, not really caring if it's generating value to the people whose money is being extracted (either through direct taxation, deferred taxation / reduction in available capital, or inflation). When you and I decide to spend money, we do it in the expectation that what we get in exchange will be valued (subjectively to us) more than our other options for things we could do with that money at that time.

I can illustrate this with a simplified example. Say the government goes to twenty people and extracts twenty dollars each from them (including you). It then uses that money and pays me (a typical government employee) the value of my time, transportation, and expenses, to go eat a large steak dinner. The next morning I distribute the end result of that dinner by taking a giant dump on your doorstep. According to the Keynesians, this has generated $400 worth of economic activity - GDP is increased and the aggregate number gods are pleased. It was extremely satisfying to me - I got the pleasure of eating a great meal, taking a huge dump, and getting paid for it all. 95% of the people whose money was taken experienced no benefit, and also experienced the loss of value (to them) that they could have obtained through the utilization of the $20 taken from them. The 5% directly affected by the end results of my action not only lost the utilization of that $20, they also have to deal with the negative effects of government activity dumping crap into their lives. But according to Keynesians, everybody wins here. And they wonder why people think their ideas are crap.

John Dewey

Mark C: "G spending is included in GDP. However, this to me leads to a great error; the government produces essentially nothing"

I agree that government by itself produces far less than it spends. But I'm not sure that including G results in an incorrect measure of GDP.

Government spending is included in the equation:

Y = C + I + G + (Ex - Im)

None of these terms represent production. Rather, the equation represents the expenditure approach for estimating GDP. G is a large part of Y because government is spending so much.

Another measure of the economy is GDI (gross domestic income). GDI is derived by summing all the incomes received in the U.S. Government incomes are a much smaller portion of GDI.

John Dewey

About the discussion of the multiplier for G: doesn't the multiplier vary by type of expenditure?

When government spends money to enforce property rights, the multiplier should be positive - at least to a certain point. I think we can agree that enforcement of property rights will lead to a more productive economy.

Private entities could create public infrastructure more efficiently than the government has done. But that doesn't mean that public creation of infrastructure - highways and ports are examples - would necessarily have a negative multiplier. Perhaps not as high as privately funded infrastructure, but not necessarily negative.

I do agree that most government expenditures likely have negative multipliers.

Daublin

It's a very interesting post. However, isn't it worth at least *mentioning* that they could spend less money? It's not a pleasant solution, but it's a very reliably one. Even a Keynesian must believe that cutting spending will eventually balance the budget.

markm

Yes, the multiplier can be negative - when the government spends money on regulations that discourage production or divert business funds to filling out paperwork.

IGotBupkis, Legally Defined Cyberbully in All 57 States

>>> "Part of the theory is that people save about 10% of their income and Government saves just about zero. "

The problem here is that the whole notion is based on the McDuck idea of wealth. All the really rich people hide all their money in great big Money Bins.

Seriously.

Now think about that. Who the EPH keeps their money in a mattress, any more?

Scrooge McDuck's proclivities are amusing, but they were never vaguely REAL. A "real" McDuck would own his own chain of banks and be loaning that "money bin" money out to others who would pay him interest.

So no, money stays in the BANK. Or in a Portfolio. No rational person keeps substantial wealth as CASH, or even substantial fixed assets that don't (or aren't believed to) appreciate in value. Even the most kanoodling housewife buying tchotchkes is doing it because (or so she believes) they have "collectible" value nowadays. The idea of buying assets earning wealth is a pretty basic concept even to those who don't explicitly think in terms of the whole mechanism.

So when you take money away from Person A to spend it on Gummint Program Y, you're preventing them from saving jack, which means that banks, who, at least nominally are EXPERTS at investing, aren't able to do that with it.

And that's why the whole Keynesian Multiplier boondoggle is total bovine excreta, even if it wasn't back in the 30s when Keynes proposed it. You're taking money from the hands of professionals at "growing" wealth§ (i.e., the bankers and portfolio managers) and putting it into the hands of people, most of whom have never even had a freakin' Real World Job in the first damned place.

That's so dunderheaded as to boggle the mind.

====§ And yes, before any socialist twit tries to point it out, YES THEY SOMETIMES FAIL. They never do worse with it -- as a class and across the whole spectrum of time and investments -- than government bureaucrats are going to do. Just look at the GSMs, or compare the US Post Office's operation with that of FedEd or UPS. Only the USPS could claim that "increased volume leads to higher expenses" (i.e., lower efficiency).

Mark C

John Dewey,

Yes I'm aware of the issue with GDP. We use it to measure the productivity of the economy but it is subject to manipulation because if the civilian portion goes down then G can go up by borrowing or printing money. Money spent on G is =1 I eventually go out of business. This is why the civilian economy will tend to grow. Non-productive behavior is NOT self-sustaining. Only thieves and government can proceed with negative behaviors and continue to sustain themselves.

There is Pournell's iron law. My spring steel law (a take off) is that any organization will bend their metrics in order to make them look good (G spending way up to cause GDP to go up so we aren't in a recession as defined by GDP). GDP is too subject to manipulation and NOT a good measure of actual productivity.

Mark C

Somehow when I posted before walking the dog I lost a some in the middle so I don’t make sense.

John Dewey,
Yes I’m aware of how GDP is calculated. Nominally GDP is used to measure the productivity of the economy. We define a recession as a drop in GDP. However, GDP is subject to manipulation because if the civilian portion goes down then G can go up by taxing, borrowing or printing money. And as point out above we are looking at aggregates. Two points: 1) GDP is a poor measure of economic health and civilian productivity and 2) The aggregate spending supports hiding #1.

If I take a private business and the GDP less than 1, it goes out of business. This is a feature, not a bug. Government is not subject to such feedback. Even N. Korea who’s government runs the economy is not subject to the feedback.

Government spending may on occasion be Keff (Effective multiplication factor) greater than 1, but most is less than 1. Law enforcement and defense, two primary functions are Keff less than 1. Social Security, Medicare, etc. are keff less than 1. Unemployment may be negative as people are incentivized not to be productive.

Because government spending has become such a large portion of GDP we need a means of determining the Keff for various economic components, government and civilian. They are not all equal.

Mark2

Why is everybody named Mark all of a sudden?

perlhaqr

Xmas: A multiplier of -1 would mean that every dollar spent by the government actually reduces overall economic activity by one dollar MORE than what the government took out in the first place.

Like where the government takes money (in the form of taxes) from productive citizens and companies and spends it enforcing laws and regulations that reduce overall economic activity.

That sounds pretty damned plausible to me.

Dave

I think in most cases the multiplier effect is less than 1, however unlike keynesian enthusiasts who claim it doesn't make a difference how you spend the stimulus funds, I think that what you actually spend the money makes a huge difference. For example:

Stimulus package 1 spends $100M getting a bunch of guys to effective go around digging holes and filling them back in.Nothing productive is created, but the guys you paid to get nothing done spend their pay.

Stimulus package 2 spends $100M providing additional infrastructure to an underdeveloped area. In addition to the construction buys spending their paychecks, you've got a reasonable chance of additional private business growth as new and existing businesses look to service a new market that previously didn't exist.

While I don't see how anyone can argue that the multiplier effect in the second case would be the same as the first, I still doubt it would be above 1 - particularly in the short term when the stimulus is intended to help.

The other factor is "what would those guys be doing otherwise?" In a case like the great depression you could argue that having large numbers of otherwise idle workers put to work on major public infrastructure will provide benefits (even if only in the long term).

But in cases where skilled construction labour is already in short supply, having workers who could have been employed by private enterprise to do productive work instead doing stuff that produces no productive outcome, I could see how it may get towards the -ve territory.

John Dewey

"Nominally GDP is used to measure the productivity of the economy."

I think GDP is designed to estimate economic output. Some then use that output to try and compare productivity over different time periods. Such comparisons lead to incorrect observations. One big flaw with GDP is that it only includes compensated output. The output of unpaid housewives, for example, is not included. As housewives moved into the paid workforce, their previously uncompensated tasks were then performed by the paid sector. Those tasks would include food preparation, child care, and, for some, housecleaning. The result was that those low productivity tasks were moved into the artificial calculation of national productivity. So the growth in national productivity appeared to slow from 1950 to 1980. But what really happened was that food preparation, child care, and housecleaning were included in 1980 figures but not in 1950 figures.

MJ

So what the difference between Keynesian and a lottery ticket?

The lottery ticket doesn't leave you with a debt hangover.

Mark

"not backed by any evidence at this point, that the value of the Keynesian multiplier shifts as debt to total GDP increases"

Of course it does. Like any economic variable, the "multiplier" has a diminishing rate of marginal return. WHen the government built the first of the interstate highways or subsidized the first pieces of railroad, the multiplier was significant. New businesses and cities sprung from these investments. But, subsequent spending created lower and lower returns, i.e. multipliers.

Mark of Distinction, 10th Dan Snark Master

>>> Why is everybody named Mark all of a sudden?

Don't whine, maybe it's just the cool thing to be :^D

Sam L.

"Mike Rizzo writes:

A typical sovereign government can secure funds from three “legitimate” places.*What are these sources?

Taxes today.
Taxes tomorrow. In other words we can borrow money today in order to build our bridge and then use future tax revenues to pay for the debt tomorrow. By the way, if the government is in the business of actually producing valuable “public goods” then you can easily think of this as value enhancing."

This assumes that taxpayers pay their taxes today, and will tomorrow. I've read that Greek taxpayers remit about 6% of what theoretically they are supposed to.

I could call this a house of cards, but it's more like a vacant lot.

http://blog.jim.com James A. Donald

Sweden is a pretty good indicator that in high tax, high spending economies, the multiplier is not merely less than unity, but is negative.

If you print some money and give it to bums, then instead of spending more, the bums work less, and lose the skills and connections necessary to do useful work, resulting in an increase in consumption in the form of leisure time, but a decrease in consumption in the forms measured as part of the GDP.